Pension freedoms – the downside for retirees
Pension freedoms that mean you can use your pension pot as you like have great advantages, but former pensions minister Steve Webb has pointed to one of the downsides, says the Mail: mortgage lenders are less keen to lend to retirees. In the old days, pensioners used their pots to buy annuities which gave them fixed income, but if you don’t buy an annuity anduse ‘drawdown’ instead, you might have similar income but it’s not guaranteed. Lenders using affordability rules like guaranteed income but tend to grant smaller loans to those using drawdown. So those who use drawdown can find it hard to remortgage their properties.
Beware loss of pension rights
An employee almost lost £10,000 from their pension because they didn’t receive a letter from their former employer, reports the Mail. Those who joined a pension scheme before October 2015 were entitled to keep all the contributions their employer put into the scheme if they left their job within two years – but have only three months to tell the employer about the scheme they want to transfer the money to. Make sure former employers have up-to-date contact details for you, says the Mail.
Don’t delay pension savings
The Sunday Times highlights the cost of putting off saving towards your pension. Taking into account the flat rate state pension (just under £160 per week), you need to amass a fund of £360,000 by age 68 in order to have a retirement income of around the national average of £27,000 per year. To accumulate that sum, you need to save £262 per month every year starting at age 25 – but if you don’t start until age 35 and that rises to £437 per month and at age 45 to a massive £794 per month. The message, says the Sunday Times, is start saving early and top up whenever you can.
Pension deficits hurt younger workers
The deficits in employers’ defined benefits pension schemes are hurting younger workers, says the BBC, citing research by Resolution Foundation. In 2016, UK firms spent £24 billion trying to plug the deficits in their pension schemes, restricting the amounts they pay employees. Resolution says this costs the average worker £200 per year. Reducing deficits benefits older employees, but younger people won’t benefit because half the UK’s 6,000 defined benefit schemes are closed and a third don’t allow any new contributions.
Many will be hit by Tory plans for care costs
Millions of people will be hit by Conservative plans for reform of care funding, says the BBC. The main reason is not the £100,000 threshold – anyone with more than that will have to use that capital to pay for their care – but the fact that the value of a home will be taken into account in means testing for care-at-home funding, where it’s ignored at present. Since three-quarters of people who currently get care funding get care in their own home (not in a care home), millions who have effectively had free care will have to pay for it.
More benefit from tax-efficient investments
More people are buying investments that benefit from exemptions from Inheritance Tax with potential 40 per cent tax savings, says the Financial Times. Investments that qualify for Business Property Relief (effectively this means they disappear from your taxable estate after you have owned them for two years) used to have high thresholds, but in recent years the minimum investment has fallen and the average subscription to new investments of this kind fell to under £14,000 in 2015-16. There are currently over 50 qualifying schemes that are open to investors.
A sharp fall in the proportion of property valuations accounted for by Buy to Let properties from 13 per cent to 7 per cent in April suggests the number of BTL purchases is set to fall, says the Financial Times. The introduction of restrictions on the tax deductibility of mortgage interest on BTLs has hit those who own property personally – the majority of small landlords – rather than through a company. However, Buy-to-Let remortgaging surged in April as landlords took advantage of a slew of competitive mortgage deals.
Taxman probes work-related expenses
HMRC is launching an investigation to employees’ work-related expenses, where claims have increased to £800 million in 2014-15. Employees are entitled to put in claims for any work-related expenses that aren’t fully refunded by their employers. For example, the HMRC maximum for mileage claims is 45p a mile, but some employers pay less, in which case the employee can claim the difference personally using a P87 claim form. Experts said HMRC was keen to eliminate agents who had encouraged employees to put in inflated claims, most of which were disallowed.
Who are the rich?
In a provocative column in the Financial Times, Paul Johnson, head of the independent think-tank the Institute for Fiscal Studies, asked: Who are the rich? Once you get past the 1,000 people on the Sunday Times Rich List (average assets £134 million), who make up 0.00002 per cent of the UK population, who else is rich? To be in the top 1% of households by wealth you need assets of £3 million including your home, which would take in many people in London and the South East. To be in the top 5 per cent, you need £1.5 million. The top-earning 1% of individuals have incomes of over £160,000 per year, and together pay a quarter of all UK income tax; the top 5 per cent of individuals pay 60 per cent of all income tax receipts. However you define the rich, says Johnson, we are uncomfortably dependent on them to fund public services.
As tax year end approaches, there is still time to make use of your available reliefs and allowances.
This tax year end planning checklist covers the main planning opportunities available to UK resident individuals and will hopefully help to inspire action to reduce tax for the 2023/24 tax year and to plan ahead for 2024/25.
As tax rate band thresholds are changing, understanding the impact on high rate taxpayers and the economy is crucial.
It was recently revealed in the media that the amount we need to enjoy a ‘moderate’ retirement has increased by £8,000 per annum, a 38% increase, in just one year.